Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
CPA, CVA | Manager
As a manufacturer, your inventory isn’t just sitting on shelves, it’s the lifeblood of your company. Every material you buy, every product you’re building and every finished good waiting to ship represents cash your business has already spent. How well you track and value that inventory has a direct impact on profitability and assists in your ability to make informed decisions.
The foundation of effective inventory tracking is knowing what you have, where it is and what it costs you, in real-time. That means recording inventory movements when they happen, from when raw materials arrive, to production, and ultimately, when they ship. Outdated or rough cost estimates lead to poor decisions about what products to focus on, where to invest, and how to price competitively.
It is also important to regularly review your bills of materials (BOMs), by using systems that capture inventory movements at the point of activity. Like anything, your inventory inputs are impacted by macro and microeconomic factors that can change your cost to produce and therefore, BOMs should be reviewed regularly to ensure that these changes are being reflected. Other factors include changing a supplier, swapping out a material or improving a process; these are all examples of changes that need to be reflected in your records right away, not months later. Stale data can turn into material variances or financial misstatements.
Knowing your accurate costing is equally as important as knowing your inventory because it directly influences pricing, margin analysis, and strategic decision-making. However, you choose to calculate what it costs to make something, including standard, actual, or activity-based costing, the method must reflect what’s actually happening on your shop floor. Inaccurate or outdated costs can lead to underpricing, shrinking margins, misinformed product decisions and misleading financial results. Clear policies about what you expected to spend versus what you already spent help you to catch inefficiencies early, before they become bigger problems.
Regular and timely review of costing assumptions matters more than most people realize. If you don’t know what it truly costs to make a product, you risk pricing too low and losing money on every sale. It is important that your costs reflect current material prices, labor rates, and overhead structures. Outdated estimates lead to poor decisions about which products to focus on, where to invest and how to price competitively.
When inventory tracking, BOM management, and costing are kept accurate and up-to-date, the payoff is significant. You’ll gain a clearer picture of what products are actually making you money, have better control over cash flow, and more confidence in management decisions especially during times of inflation, supply chain disruptions, or rapid growth. In short, strong inventory practices aren’t just an accounting exercise. They’re one of the most practical tools you have for running a healthier, more resilient business.
